Tax Preferential “Opportunity Zones” Begin Sprouting Throughout States

By FOCUS, a Leonine Business

Many state lawmakers and investors are familiar with enterprise zones – undeveloped or impoverished areas where tax incentives are offered to encourage investment and economic development – as the concept has been around for nearly 40 years. In that time every state has implemented enterprise zones, allowing investors to gain state tax benefits while providing an economic boost in distressed or disadvantaged areas. Until last year though, such a program did not exist at the federal level.

The 2018 federal Tax Cuts and Jobs Act contained a bipartisan provision which authorized enterprise zone at the federal level. These new zones are called “opportunity zones,” after the Investing in Opportunity Act, which was sponsored by Sen. Tim Scott, R-South Carolina, and Sen. Cory Booker, D-New Jersey. The provisions of this bill were inserted into the tax cut act by Senator Scott and took effect immediately with the passage of the bill, pending the promulgation of regulations by the Department of Treasury.

According to the IRS, opportunity zones are economically distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment. As such, they bear a striking similarity to enterprise zones, in both how they function and their goals, the main difference being they provide incentives to an investors federal taxes as opposed to state taxes.

Due to the act’s passage at the very end of 2017, on December 22, the dust had not settled enough for opportunity zone legislation to catch on during the 2018 legislative sessions, which began just days later in early January. A year later though, such legislation began popping up throughout the states during the 2019 sessions. This year, opportunity zone legislation has been introduced in at least 27 states and enacted in eight. Opportunity zones have been designated by the federal government in communities in all 50 states, the District of Columbia, and several territories, including the entirety of Puerto Rico. One year ago, only 18 states had designated opportunity zones.

State legislation on this issue typically seeks to designate a specified area as an opportunity zone, or extending state tax benefits to federal opportunity zones, allowing for further benefits for those looking to invest in opportunity zones.

Research on the effect of these types of programs has been mixed, finding that while the programs do attract investment and increase property values, they also tend to shift jobs rather than create jobs. In response to some of these perceived pitfalls, the Department of the Treasury issued new regulations in April regarding investment in opportunity zones, aimed at encouraging small business growth in opportunity zones, and has further plans to develop a data collection system to evaluate the efficacy of opportunity zones. With the federal government taking steps to enhance investment in opportunity zones, states that have already enacted opportunity zone legislation stand to gain the most benefit from the program. As the benefits of opportunity zones continues to develop, and knowledge of them becomes more widespread, states that have not enacted supporting legislation would be wise to consider it during the 2020 legislative sessions.